You are interested in purchasing a tract of rangeland for grazing cattle. The seller proposed a price to you of $650/acre. The seller is currently renting out the land for $25/acre which you believe to be a reasonable estimate of the return on land that you could receive at the end of your first year of ownership. You expect that net earnings will grow at 1.5% annually and the land's market value will grow at 3.75% annually for the entire time you own the property. You currently face an after-tax opportunity cost of capital of 5.5%, a marginal income tax rate of 30%; and a capital gains tax rate of 15% which you also expect to be constant across your window of ownership. i. Calculate the NPV for a 10, 20, and 30-year planning horizons (15 points) ii. Calculate the Bid Prices of land for the 10, 15 and 25-year planning horizons assuming the future terminal value will adjust in proportion to the price paid. (6 points) iii. Comment on the appropriateness of the stated assumption in ii above. What could be a better means of managing future terminal value and why? (2 points) iv. Using a defensible simplified approach, calculate the Bid Price for the parcel of land described above to reflect a situation where you expect no growth for either the annual cash flows and land value across time but all else above remains the same. (3 points) V. Given your answers above, should you purchase the land at the offered price? Should you attempt to re-negotiate the terms of the sale? Explain briefly. (4 points) You are interested in purchasing a tract of rangeland for grazing cattle. The seller proposed a price to you of $650/acre. The seller is currently renting out the land for $25/acre which you believe to be a reasonable estimate of the return on land that you could receive at the end of your first year of ownership. You expect that net earnings will grow at 1.5% annually and the land's market value will grow at 3.75% annually for the entire time you own the property. You currently face an after-tax opportunity cost of capital of 5.5%, a marginal income tax rate of 30%; and a capital gains tax rate of 15% which you also expect to be constant across your window of ownership. i. Calculate the NPV for a 10, 20, and 30-year planning horizons (15 points) ii. Calculate the Bid Prices of land for the 10, 15 and 25-year planning horizons assuming the future terminal value will adjust in proportion to the price paid. (6 points) iii. Comment on the appropriateness of the stated assumption in ii above. What could be a better means of managing future terminal value and why? (2 points) iv. Using a defensible simplified approach, calculate the Bid Price for the parcel of land described above to reflect a situation where you expect no growth for either the annual cash flows and land value across time but all else above remains the same. (3 points) V. Given your answers above, should you purchase the land at the offered price? Should you attempt to re-negotiate the terms of the sale? Explain briefly. (4 points)
